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Pueblos Prevail In NM 'Free Play' Gambling Revenue Fight

Posted by April E. Olson | Apr 04, 2019

Law360 (April 3, 2019, 6:33 PM EDT) -- Six pueblos have bested New Mexico in a dispute over the state's attempt to collect millions in additional revenue related to "free play" credits on the tribes' gambling machines, with a federal court permanently enjoining the state from enforcing its claims.

U.S. Magistrate Judge Kirtan Khalsa ruled Saturday that the New Mexico Gaming Control Board has no right to claim that the tribes' casinos owe the state additional revenue-sharing payments.

The decision granted the Isleta, Sandia, Tesuque, Santa Ana, Santa Clara and San Felipe pueblos' motions for summary judgment, nixing the state's argument that the tribes excluded the face value of free-play credits won by patrons and deducted the value of those prizes from the net win of their electronic Class III gambling machines.

Judge Khalsa pointed to testimony from the pueblos' expert witness Andrew Mintzer, who asserted that under generally accepted accounting principles, the value of free play cannot be included in gross gambling revenue.

"According to Mr. Mintzer, free play is not included in a gaming entity's revenue because it does not represent actual or expected cash in-flow or its equivalent, or, in simpler terms, because a casino doesn't make any money when a customer uses it," the judge wrote in her order. "Defendants have presented no evidence that refutes Mr. Mintzer's statements on these points."

On Oct. 16, U.S. District Judge Kenneth J. Gonzales gave notice that Judge Khalsa was available to conduct all proceedings and enter a final order dispositive of the parties' summary judgment motions. The notice added that counsel for the state and pueblos consented on Oct. 15 to referral of their motions.

Judge Khalsa also enjoined New Mexico from pursuing arbitration under the state's 2015 compacts with the pueblos in an attempt to enforce its claims that the tribes owe the additional revenue-sharing payments from their net win between 2007 and 2016. She found that the 2015 compact provisions preserving the state's claims for additional revenue-sharing payments are invalid because they constitute an attempt to impose an illegal tax under the Indian Gaming Regulatory Act.

The pueblos of Isleta, Sandia and Tesuque in June 2017 initially accused New Mexico officials in federal court of improperly attempting to treat as revenue the free-play credits that are popular with gamblers and that casinos use to encourage their play at slots.

The tribes filed their complaint against Gov. Susana Martinez — since replaced by current Gov. Michelle Lujan Grisham — along with state Gaming Control Board Chair Jeffrey S. Landers and two other members of the gambling board. The complaint sought a declaration that the state's attempt to make the tribes retroactively include free-play credits in the revenue-sharing payments under 2007 gambling compacts flouts federal law.

According to the complaint, the tribes' 2007 compacts were replaced by new ones they inked with New Mexico in 2015, which contain a provision giving the state a two-year period to bring a payment dispute arising from the old deal.

In April 2017, the state sent the tribes letters asserting that prizes awarded from the use of free play are not deductible from revenue-sharing payments and demanding additional money under the 2007 agreement — a total of $10,360,149 from the Pueblo of Isleta, $26,491,350 from the Pueblo of Sandia and $3,252,873 from the Pueblo of Tesuque, the complaint said.

The pueblos of Santa Ana and Santa Clara then intervened later in June 2017 with their own complaint in federal court, after gaining Judge Khalsa's approval, and in July 2017, the Pueblo of San Felipe also moved to intervene and won the judge's approval.

Richard W. Hughes, a lawyer for the Pueblo of Santa Ana and the Pueblo of Santa Clara, told Law360 in an email Wednesday, "The pueblos feel that Judge Khalsa's decision fully vindicates the position the pueblos (and other gambling tribes in the state) have taken since this dispute first arose, nearly 10 years ago, that the Gaming Control Board's demands — that the tribes should be paying revenue share on free play credits, which by definition are not revenue — violated the express terms of the compacts and federal law, not to mention common sense."

Representatives for the other pueblos and New Mexico were not immediately available for comment Wednesday.

The Pueblo of Isleta and Pueblo of Sandia are represented by Gary F. Brownell, David C. Mielke, Douglas B.L. Endreson and Frank Holleman of Sonosky Chambers Sachse Mielke & Brownell LLP.

The Pueblo of Tesuque is represented by Thomas J. Peckham of Nordhaus Law Firm LLP.

The Pueblo of Santa Ana and the Pueblo of Santa Clara are represented by Richard W. Hughes and Reed C. Bienvenu of Rothstein Donatelli LLP.

The Pueblo of San Felipe is represented by Gwenellen P. Janov of Janov Law Offices PC.

The New Mexico officials are represented by Stefan Sloane and Eric J. Locher of the New Mexico Gaming Control Board.

The case is Pueblo of Isleta et al. v. Gov. Michelle Lujan Grisham et al., case number 1:17-cv-00654, in the U.S. District Court for the District of New Mexico.

--Additional reporting by Andrew Westney. Editing by Orlando Lorenzo.

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April E. Olson

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